Professor, The Hong Kong Polytechnic University

Professor Cheng has over 80 articles published in academic journals including the Journal of Finance. He served as a project consultant for Bank of China, Investor Education Centre (IEC), Securities and Futures Commission (SFC), Mandatory Provident Fund Scheme Authority, Financial Services & Treasury Bureau, Value Partners, Agricultural Bank of China, Hong Kong Exchanges (HKEx), Charles Schwab.

  • Relative Valuation Effects of Local and International Analysts’ Voting: The Case of Investor Relations Award

    Louis T.W. CHENG    Louis T. W. Cheng, Allen C. C. Ng, Jianfu Shen
    09 Oct 2018

    This article qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

    Using A share and H share of the same company listed in Mainland and Hong Kong markets, Jia et al. (2017) document the social connection effect of local and international investors on analyst recommendations. We further test this social connection effect between international/local analysts and international/local investors by exploring the voting pattern of international/local analysts on investor relations (IR) awards. Through proprietary data of analysts voting on stocks in the Hong Kong stock market, we examine the social connection effect between the international and local networks of analyst-investor connection by using the stocks listed in the same market.
    First, our finding indicates that the valuation effect of IR award announcements is positive and significant. Awardees receiving stronger voting from international analysts/investors experience a higher valuation effect upon announcements. Next, opaque firms experience a larger announcement effect than that of more transparent firms from international analyst voting. Since the voting behaviors of international and local analysts are not directly observable by the market, we conjecture that these international voters/investors disseminate the positive information of (or even trade) these voted firms in the own social connection network, leading to the differential valuation effect for the two groups. This result also suggests that international analysts have a more “powerful” connection to their own investor group, leading to a more favorable market reaction compared with the locally supported stocks.
    Additional analyses are conducted on trading volume, earning forecasts, and information transparency. First, trading volume has significantly increased for the awarded firms and the low international vote subsample using a pre-post event comparison. Next, the finding on firm-level transparency using the R-square suggests that the non-awarded sub-sample shows significant improvement in transparency during the event and the post-event periods. Our findings on valuation effect and information transparency are consistent with the literature related to IR recognition and third-party certification. 
    Our study is important, as we provide evidence of voting behavior for international analysts. While the IR award is given to Hong Kong listed stocks, a significant portion of the analysts (212 out of a total of 552 voting institutions) is employed by international firms with headquarters located overseas. Our research finding sheds light on the influence of international versus local analysts on the valuation, liquidity, and transparency of nominated firms.